Investors and analysts always have a game that gets played during earnings season. Traditional investors might just assume that how a company’s stock will act is how a company did versus a year ago or compared to a quarter earlier. The reality is that what really drives how many investors rate a company is how the revenues and earnings compare to the analyst expectations. Then they have to factor in how guidance stacks up against estimates.

24/7 Wall St. has tracked earnings and analyst calls for years. Almost every earnings season there are some stocks that get gutted after what normally would appear to be good or even great earnings. This is quite common among high-growth companies, but it really looks atrocious when huge drops are seen in some of the great companies that have been around for many years.

It is rather important to consider that the stock market has hit all-time high after all-time high. The Dow even broke the 22,000 mark. This is a time that economists, market pundits and many fund managers have warned about the dangers in today’s market valuations. It turns out that companies may currently be targeted by profit takers and short sellers for any report that doesn’t look — particularly if the stock was way up.

The corrections seen here might not seem that grand versus big tech or biotech disappointments. The problem is that the drops seem overdone, and they may represent solid buying opportunities for investors looking for solid companies with defendable earnings growth ahead. Now we just have to see if the GDP growth can get back above 2% and stay there.

In an effort to keep things fairly uniform, we have generally concentrated on earnings per share (EPS), and trading color has been included on how much the stocks had gained ahead of earnings and how they have done since. Also included is past trading data and additional color, as well as consensus estimates on results and on analyst targets from Thomson Reuters.

While management commentary tends to be positive even when things are not so positive, we have also included some of management’s commentary on each report to show that there was a lack of negativity about the business as a whole.

Cummins: Engines Galore Meet Peak Auto

Cummins Inc. (NYSE: CMI) shares were down about 5% after the engine-maker’s second-quarter profit of $2.53 per share was just under expectations (versus $2.40 a year earlier and a $2.58 consensus estimate). Meanwhile revenues rose by 12% to $5.1 billion. The disappointment here was partly tied to higher warranty costs, but Cummins said strong truck and construction demand was allowing it to raise guidance for revenue to rise 9% to 11%, up from a prior 4% to 7% target.

Maybe the worry is peak auto here, but it just wasn’t a disaster. One issue to consider was that Cummins was up 25% so far in 2017. Despite peak auto concerns, analysts expect engine orders and earnings to keep rising.

Cummins shares were recently trading at $156.45, and it has a 52-week range of $116.03 to $170.68. The dividend yield is 2.6%. Cummins Chairman and CEO Tom Linebarger said in his report:

We delivered strong revenue growth in all four operating segments in the second quarter due to improving conditions in a number of important markets where we also have leading share. Earnings increased due to solid operational performance, partially offset by higher warranty costs that resulted in second quarter EBIT that was below our expectations. As a result of stronger than expected orders in truck and construction markets in North America and China, and improving demand from global mining customers we have raised our 2017 full year outlook.

Eaton: Power Equipment Not Powerful Enough?

Eaton Corp. PLC (NYSE: ETN) was trading at about $78 prior to earnings, and then shares immediately fell from $77.62 to $73.66 before trying to pose a recovery. This was last seen down over 6% for the week alone, and the stock was back under $74 on Thursday. Eaton’s profit of $515 million translated into EPS of $1.15 on revenues of $5.13 billion. The earnings were up 7% and were at the high end of its guidance, but the consensus estimates were $1.16 EPS and $5.14 billion in revenues. And guidance for this quarter of $1.20 to $1.30 EPS compared with a consensus estimate of $1.27.

One thing that might be an issue was that Eaton shares were up 17% in 2017 ahead of earnings, and up almost 25% from a year earlier. Still, segment margins rose 1.4 points sequentially to 16.2%, and the company spent another $210 million buying back its own stock from cash flows. There were some issues in power sales, but Eaton is now down 10% from its 52-week high, and its dividend yield is 3.2%.

Shares of Eaton were last seen at $73.20. The stock has a 52-week range of $59.07 to $81.63 and a consensus analyst price target of $79.50. Craig Arnold, Eaton’s board chair and chief executive officer, said in the report:

Our second quarter net income and operating earnings per share were at the high end of our guidance range. Coming into the quarter, we had expected organic sales would be up between 1 and 2 percent and negative currency translation would be 1.5 percent. Our organic sales grew 2 percent, the high end of our guidance range, and negative currency impacted sales 1 percent, less than we had expected. Organic growth of 2 percent was the same growth rate we experienced in the first quarter of 2017. … Segment margins in the second quarter were 15.6 percent. Excluding restructuring costs of $27 million incurred in the segments in the quarter, segment margins were 16.2 percent. This represents a step up of 1.4 percentage points over the first quarter of 2017.

General Dynamics: Where Defense Wasn’t Defensive Enough

General Dynamics Corp. (NYSE: GD) reported net income of $749 million in its second quarter, for $2.45 in EPS. This defense contractor met its consensus earnings estimate, but revenue of $7.68 billion in the quarter was about $100 million short of expectations. General Dynamics gave earnings guidance of $9.70 to $9.75 per share for the full year. Ahead of the earnings, its stock had been up close to 20% in 2017 and up over 40% in a year.

The shares had been hitting $205 ahead of earnings and closed at $203.56 right before the report. The share price fell to $194.44 afterward and then went down to under $194 before recovering to $198.10 on last look. That was a drop of more than 5.5% tied to what otherwise might have been more than acceptable or might have been considered a solid earnings report.

Shares of General Dynamics have a 52-week trading range of $146.82 to $205.90. The consensus price target is $214.59, and the dividend yield is 1.7%.

The formal earnings report and statement from General Dynamics was far shorter than at many other companies. Phebe N. Novakovic, board chair and chief executive, said:

General Dynamics’ strong second quarter performance reflects our focus on operations and executing on our programs. We are confident in our outlook for the future, built on a solid defense backlog and continued good order activity across the portfolio of Gulfstream business jets.

3M: Top Dow Conglomerate Treated Like GE

3M Co. (NYSE: MMM) turned in earnings of $2.58 per share, up from $2.08 a year earlier and versus a consensus estimate of $2.55. Revenue rose to $7.81 billion, versus $7.66 billion a year ago, but it was less than $100 million under consensus. 3M revised its earnings guidance in a range of $8.80 to $9.05 per share from a prior range of $8.70 to $9.05. Its electronics and energy sales rose, but there was slower growth in industrial sales. Had 3M shares not been up about 18%, this would have otherwise been more than adequate for Wall Street.

3M is now one of the most important Dow stocks, with a $200 or more stock. Its biggest sin might have been that shares were up about 18% so far in 2017 ahead of earnings, and significant profit taking was seen right after the call before a recovery. Merrill Lynch was much more positive about 3M after earnings than its peers.

3M shares traded at $206.32, with a consensus analyst target of $205.27 and a 52-week range of $163.85 to $214.57. The dividend yield is 2.3%.

Inge G. Thulin, 3M board chair and chief executive, said of the quarter (with guidance included):

Our team posted another quarter of strong and broad-based organic growth, which included positive growth across all five of our business groups. We also continued to deliver premium margins and returns, while accelerating investments to support growth and strengthen the portfolio – which is part of our playbook to build an even stronger and more competitive 3M. … Coming off a strong first half of the year, 3M updated its guidance for 2017. The company now forecasts organic local-currency sales growth to be 3 to 5 percent, up from previous guidance of 2 to 5 percent. 3M expects earnings in the range of $8.80 to $9.05 per share – up 8 to 11 percent year-on-year – versus a prior expectation of $8.70 to $9.05.

Sherwin-Williams: A Great Merger Treated Improperly

Sherwin-Williams Co. (NYSE: SHW) is considered just a consumer paint company by many investors, but it grew even further into coatings and industrial after closing its Valspar acquisition. Its stock has been gutted since earnings in mid-July. Net income of $319 million generated adjusted earnings of $4.52 per share, about three cents shy of estimates. Revenue of $3.74 billion topped expectations by more than $100 million. Guidance was for earnings of $4.80 to $5.20 per share (versus $4.93 expected) one quarter out and $14.80 to $15.20 for the year (versus about $15.00 expected).

Sherwin-Williams traded at $359.72 a share on July 19, and it fell to $350.78 the following day. Its shares have continued to slide since and were last seen trading at $334.30. That decline has turned into a 6% post-earnings drop, and what was a good acquisition on its part came with higher costs tied to the merger. This deal will have paid off in the long run, but Wall Street is often in the business of today. Analysts even expect its dividend of $3.40 per share to hit $4.00 in two years. Some of the selling is likely profit taking because the stock had risen 30% in 2017 before the latest sell-off.

Shares of Sherwin-Williams have traded between $239.48 and $362.57 in the past year. The consensus price target is $377.63, and the dividend yield is 1.0%.

John G. Morikis, board chair and chief executive of Sherwin-Williams, said:

It is gratifying to finally report a quarter that includes results from Valspar. We are pleased to have completed the acquisition, and I would like to once again welcome our colleagues from Valspar and the tremendous talent they bring to Sherwin-Williams. This acquisition accelerates Sherwin-Williams’ global growth strategy and creates the global leader in paints and coatings. The combination of these two companies forms a world class brand portfolio, expanded product range, premier technology and innovation platforms and an extensive global footprint. … Looking ahead, our focus is on strengthening the performance of our core businesses while completing the integration of the two companies with speed and precision. The former will require us to drive stronger architectural paint sell-through across all retail channels and capture raw material cost increases through appropriate pricing initiatives, particularly in our industrial coatings businesses. … For the third quarter, we anticipate our Sherwin-Williams’ core net sales will increase a low to mid single digit percentage compared to last year’s third quarter. In addition, we expect incremental sales from the Valspar acquisition to be approximately $1.0 billion in the third quarter.

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24/7 Wall St. has included clickable six-month charts below from StockCharts.com. This shows the charts of Cummins, Eaton, General Dynamics, 3M and Sherwin-Williams versus the same period against the Dow and S&P 500 exchange traded funds.

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